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Financial Management

Requirements that apply when you act as Agent for the Insured

Insurance brokers holding an Australian Financial Services licence that are acting as agent of the insured are required to pay certain money into an account that meets specified requirements and hold it on trust for the person who is entitled to it.

These requirements apply to both retail and wholesale clients.

The account must be:

  • with an Australian Authorised Deposit-Taking Institution (ADI), a cash management trust or an approved foreign deposit taking institution; and
  • designated to be, and operated as, a trust account.

You may maintain a single account or two or more accounts under section 981B. 2

When must any money be paid in?

The relevant money must be paid into the account on the day that the money is received or on the next business day.

What money can be paid into the account?

In summary, when you act as agent of the insured, all:

  • premium received from the insured (or its agent); and
  • return premium and claims payments received from the insurer (or its agent),

must be paid into the account (Relevant money)

Single payments of different types of money

If other types of money are paid in a single payment with what are or might be mixed with Relevant Money, the money can be paid into the account (e.g. commission and fees etc). The issue is then whether the money mixed in the single payment must be paid out of the account, if at all and when.

Payment of other money not mixed with Relevant Money

If money is received which is not Relevant Money or mixed with Relevant Money, it cannot be paid into the account.

When must money be paid out?

Unidentified money in single mixed payment

If at the time of the receipt of the mixed payment you can't identify whether the money contains Relevant Money and you believe it might include it, you must, as soon as practicable after paying it into the account, identify any part that is not Relevant Money and remove it from the account.

Mixed payment including Relevant Money

If a single payment is received that you know includes Relevant Money, you must as soon as practicable, but within one month after it is paid in, remove any part that is not Relevant Money. 3  

What is practicable will depend on the circumstances of your business and your account clearing practices.

Commission

Many brokers ask whether commission (including GST) which is received from the insured as part of the premium needs to be removed. It is in NIBA's view able to be left in the account and need not be removed like other non Relevant Money. The commission, once earned can of course be removed from the account at your discretion subject to maintaining the minimum balance necessary in the Account. ASIC has not indicated in its discussions with NIBA that it will take a contrary view.

Fees

Fees (including GST on the Fee) and other amounts paid by way of remuneration to you by the insured (other than commission) are not likely to be type of money that can be kept in the account and should be paid out of the account in accordance with the above procedure if received in a mixed payment.

Premium

The arrangements for the payment of premium to the insurer are basically the same as those that applied under the repealed Insurance (Agents and Brokers) Act 1984.

Premium or an instalment of premium (premium) received by you when the insurer has accepted the risk or a part of the risk and you know the amount to be paid, must be paid to the insurer (or its agent):

  • within 90 days after the cover incepted or the first day of the period to which the instalment of premium relates; or
  • if it is not practicable for the licensee to pay the amount within the relevant period – as soon as practicable after the end of that period. 4

Nothing prevents the insurer and insurance broker from agreeing that "payment" has been made and adjusting accounts between them accordingly.

You can also agree with the insurer (or its agent) to pay the amount to the insurer at an earlier time or pay on behalf of the insurer, out of the money received, any charges required by law to be paid by the insurer in relation to the contract of insurance (eg stamp duty). You can deduct from the premium any remuneration payable by the insurer to you in relation to a contract of insurance. 5

If you have not received the premium within the relevant period, you must notify the insurer (or its agent) in writing not later than seven days after the end of the relevant period, unless you receive the amount within that further seven day period and before you have notified the insurer that the amount has not been received. 6

Where you receive money from or on behalf of an insured or intending insured in connection with a contract or proposed contract of insurance and at the end of 30 days after the day on which the money was received all or part of the risk has not been accepted, you must, within 7 days after the end of the 30 day period:

  • give notice to the insured or intending insured, in a form (if any) approved by ASIC (none approved), that the risk or part of the risk has not been accepted; and
  • return the money or that part of the money that related to the part of the risk that has not been accepted, to the insured or intending insured.
  • return to the insured or intending insured. 7

Where you receive money from, or on behalf of, an insurer, for payment to, or on behalf of, an insured, you must pay the money to the insured:

  • within seven days after you received the money; or
  • if it is not practicable to do this, as soon as practicable after the end of that period. 8

You and the insured can agree that you are to pay an amount to them an earlier time and you can exercise any legal right available to you to deduct from the money any amount payable by the insured to you in connection with a contract of insurance. 9

Who is the money held on trust for?

The money must be held on trust for the benefit of the person who is entitled to the money.

When the insurer accepts the risk you hold the premium on trust for the insurer, unless the insurer agrees otherwise with you . 10

You may also hold other money on trust for the insurer given the operation of the deemed receipt provisions.

Where a contract of insurance is arranged or effected by you for the client, payment to you of money payable (whether in respect of a premium or otherwise) by the insured under or in relation to the contract or one which is to be arranged or effected, is a discharge, as between the insured and the insurer, of the liability of the insured to the insurer in respect of the money . 11

Payment by an insurer to you of money payable to an insured, whether in respect of a claim, return of premiums or otherwise, under or in relation to a contract of insurance, does not discharge any liability of the insurer to the insured in respect of that money. 12 Such money would appear to be held on trust for the insurer until paid to the insured.

Any agreement that is contrary to the above provisions is void. You can however agree with the insured to set off against money payable to the insured, money payable by the insured to you in respect of premiums. 13

Permitted investments

The licensee is permitted to invest Relevant Money held in its section 981B account in specified ways 14 without the need for the agreement of the insurer or insured. 15

Who is entitled to interest on the account?

You are on any of the insured’s money, provided you disclose to them that you are keeping the interest (if any) earned on the account on money they are entitled to. You can make this disclosure in any way you choose. It can be done orally or in documents such as your retainer letter or Financial Services Guide. Given the deemed receipt provisions discussed above it will be rare that you hold any money the insured is entitled to.

In relation to insurer money, once the insurer accepts the risk you are entitled to interest on money in the account. 16

Any interest earned by you on the account can be kept in the account 17 and you can withdraw any interest you are entitled to at any time. You need not have it paid into the account however.

When can you make a withdrawal?

You may make withdrawals of money from the account in any of the following circumstances: 18

  • making a payment to, or in accordance with the written direction of, a person entitled to the money;
  • defraying brokerage and other proper charges;
  • paying to the licensee money to which it is entitled;
  • making a payment of moneys due to an insurer in connection with a contract of insurance; and
  • making a payment that is otherwise authorised by law.

Payments to other licensees

You may withdraw Relevant Money from your account and pay it to another licensee (the receiving licensee) (e.g. another broker):

  • you must notify the receiving licensee, at the same time as the payment is made or as soon as practicable after, that the money has been withdrawn from your account and that it should be paid into the receiving licensee's account; and
  • the receiving licensee must pay the money into its section 981B account not later than the day after it receives the payment. 19

1.1 The above will not apply where the receiving licensee is not subject to the section 981B requirements (e.g. agent of insurer – See below for details). Typically this will be relevant where there is a retail and wholesale broker arrangement.

1.2 Minimum balance

You must ensure that the total of:

  • the amount in the section 981B account; and
  • the total amount previously withdrawn from the account and currently invested in permitted investments;

is at least the sum of:

  • any amounts that insurers are entitled to receive from the account; and
  • any amounts that insureds or intending insureds are entitled to receive from the account. 20

Regulations 7.8.02 (6A)-(6C) sets out when money is seen to be entitled to be received for the above purpose.

ASIC Requirements that apply when you act as Agent for the Insured

ASIC sets out its current position in QFS 139 "What should an insurance intermediary do with premiums paid to it by a client".
ASIC appears (it is not entirely clear) to take the view that if premium is paid to a licensee that is not the insurer (this would include an insurance broker acting under binder for the insurer under its own licence), the insurance broker must comply with the Part 7.8 requirements, or if the risk has not passed when the money is received, it could comply by meeting the section 1017E requirements or the section 981B requirements.

The position is not entirely clear given the way in which the legislation has been drafted.

If the view is taken that an insured acquires the insurance policy from the licensee insurance broker acting as agent of the insurer "by way of issue by the licensee", then the agent licensee of the insurer is not required to pay the Relevant Money into the section 981B account.

Any licensees acting under binder as agent of the insurer have a licence authorising them to "issue" which suggests that this applies to them.

The note to the relevant provision 981A(2)(c) also provides that money excluded by this paragraph is covered by section 1017E. Section 1017E applies to money received by an issuer (or their agent) for an insurance contract, where the contract has not been issued at the time it is received.

This also appears to suggest that any money paid to a licensee agent of an insurer that "issues" the contract is not intended to be caught.

If the above view is incorrect, the relevant licensee agent of an insurer must keep the relevant moneys in the account in accordance with section 981B.

Given the uncertainty, most insurance broker licensees acting as agent for insurers under their own licence have taken the view that they will act in accordance with the section 981B requirements (as outlined above) in any case.

Important Disclaimer

This document is designed to provide helpful general industry guidance on some key issues relevant to this topic. It sets out NIBA's view on these issues and should not be relied on as legal advice. It does not seek to set any minimum standard nor is it binding upon you. You can choose to take different views and approaches. It does not cover everything that may be relevant to you and does not take into account your particular circumstances. It is only current as at the date of release. You must ensure that you seek appropriate professional advice as to the currency, accuracy and relevance of this material for you. NIBA will seek to liaise with members and relevant Government bodies on an ongoing basis in order to update this guidance.

Footnotes

  1. Subdivision A of Division 2 of Part 7.8 of the Act
  2. Section 981B(2)
  3. See Regulation 7.8.01(11-14) for details
  4. Regulation 7.8.08.
  5. Regulation 7.8.08(10)
  6. Regulation 7.8.08(3) and (4)
  7. Regulation 7.8.01(13)-(15)
  8. Regulation 7.8.08(16)
  9. Regulation 7.8.08(17)
  10. Regulation 7.08.05(2)
  11. Section 985B(1) and (2)
  12. Section 985B(3)
  13. Section 985B(4) and (5)
  14. Regulation 7.8.02(2)
  15. Regulation 7.8.01(4)(a) and (b)
  16. Regulation 7.8.05(4)
  17. Section 981B(1)(b)(ii)
  18. Regulation 7.8.02(1)
  19. Regulation 7.8.02(1A)
  20. Regulation 7.8.02(6)